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In the season of elections animal spirits rule. India’s equity markets have been ebullient for some time now. Spurred by a robust inflow of foreign investment capital, markets have reacted favourably. A lot now depends on the ability of the next government to enact meaningful structural reforms, especially in a sector such as agriculture that requires modernization. Will things turn out as expected?

Reforms in agriculture are important for more than one reason. Apart from the huge number of people it employs, fortunes of the retail sector depends on what happens in farms. Infact, FDI in retail and modernization of agriculture are two faces of the same coin.

As far as the economic implications of retail FDI go, attention has been focused exclusively on its impact on the livelihood of local retailers, who are likely to take a hit on competition from the likes of Wal-Martand Tesco. The ability of local retailers to organize into an effective lobby voicing their concerns could perhaps explain this. The actual implications of retail FDI, however, are likely to extend well beyond the narrow confines the debate has been limited to.

Indian farmers are likely to be the biggest beneficiaries of a competitive retail sector, given the imbalances in the agricultural produce market. Restrictions imposed by the Agricultural Produce and Marketing Committee (APMC) Act have effectively barred them from selling their produce at remunerative prices, restricted the size of their potential market, and, most importantly, prevented competitive bidding for the produce.

Currently, the agricultural supply chain is monopolized by powerful middlemen and politically influential local groups who control mandis or wholesale markets—resulting in a huge wholesale-retail price gap. There could be little doubt that allowing FDI in retail, when complemented by scrapping the APMC Act to open up the market for wholesale procurement, will help farmers command better prices for their produce. It is likely to lead to better farming returns, increased production and lower prices for customers.

Insufficient investment in cold storage and other supply chain facilities is another major worry, but something that has been ignored for long. A study by the Associated Chambers of Commerce and Industry of India (Assocham) and Yes Bank points to the enormous shortage of warehousing capacity in India, estimated at around 35 million tonnes. The food grain wastage owing to the shortage is estimated at around 20% to 30% of the total harvest.

The reasons are not hard to find. India’s agricultural storage infrastructure was created at a time when food grains such as rice and wheat formed a disproportionate part of food consumption. It was assumed that dietary habits would remain constant for the foreseeable future. It made sense when rural incomes did not rise significantly. Even in urban areas, where food consumption was more diversified, demand for food grains remained high.

That pattern has changed dramatically in the last decade. With rising urban and rural incomes, food consumption has diversified greatly. Milk, eggs and other protein-rich diets are now a significant part of the food basket. A great part of food inflation is protein inflation, as the demand for these foodstuffs greatly outstrips supply.

Changing this requires fixing the broken supply lines with agricultural markets. For example, transporting milk to cities does not require food storage facilities but chilling plants and fleets of trucks equipped with cooling units. These investments need FDI in agricultural markets that cannot be made by governments not only due to financial constraints but also due to lack of expertise.

Given the gains that farmers and—more importantly—consumers could potentially reap, reforms aimed at strengthening the agricultural supply chain will obviously be welcome. However, reforms uprooting today’s deeply entrenched special interests will be hard to come by unless the political weight of farmers and consumers is combined for better results.

March 18, 2012: The Union Budget identifies agriculture as one of the sectors which has shown a growth of 2.5 per cent in the current year. The Union Budget clearly establishes supply chain bottlenecks as one of the key issues in agriculture and one of the primary reasons for demand-supply gap and inefficiencies in post harvest distribution.

With an aim of “faster, sustainable and more inclusive growth” the Finance Minister has clearly identified “supply bottlenecks in agriculture and delivery systems” as one of the top five objectives that the government must address effectively in the ensuing fiscal year. Given that agriculture is recognised as central to our nation’s growth strategy, it is critical to implement measures planned to boost agricultural development and reduce supply bottlenecks in the union budget, and look for enablers that would allow us to achieve this objective.

AGRICULTURAL DEVELOPMENT – KEY FOCUS AREAS

Building on the four-pronged strategy of agricultural production, reduction in wastage of produce, credit support to farmers, and a thrust to the food processing sector envisaged in the previous budget, the finance minister has emphasised on the need to remove bottlenecks in production and distribution of food products that are driving inflation. Some of the key focus areas include:

Increasing farm productivity

The green revolution envisaged in the Eastern region of the nation has been given a further fillip by increasing the allocation to Rs 1,000 crore, an increase of 150 per cent with a focus on rice based cropping systems catering to the Eastern region’s requirements. This increase in allocation has been primarily due to the significant increase in yield and productivity as a result of this initiative.

The strategy for increasing production of agricultural commodities focuses on providing incentives to farmers through various development programmes. Outlay for programs under Crop Husbandry is Rs 18,215.78 crore, of which Rs 9,217 crore is for State Plan Scheme, ‘Rashtriya Krishi Vikas Yojna’.

A token provision of Rs 1 crore each has been proposed for new schemes, viz. National Mission on Agriculture Extension, National Mission on Seeds and Planting Material, National Mission on Agricultural Mechanisation, National Mission on Oilseeds and Oil Palm, National Mission for Sustainable Agriculture, Integrated Scheme for Farmers’ Income Security, Central Agriculture Infrastructure and Establishment Scheme and National Centre for Crop Statistics in order to further energise the role of these pivotal organisations.

In addition, the National Mission for Protein Supplements and the Accelerated Fodder Development Programme has been strengthened, and to improve productivity in the dairy sector, a Rs 2,242-crore project is being launched with World Bank assistance. To broaden the scope of production of fish to coastal aquaculture, apart from fresh water aquaculture, the outlay in 2012-13 is being stepped up to Rs 500 crore.

Increased access to farm credit

Reinforcing the need to increase the access to credit, the finance minister has raised the target of credit flow to farmers from Rs 4.75 lakh crore to Rs 5.75 lakh crore which represents an increase of Rs 1 lakh crore over the target for the current year. In addition, existing interest subvention scheme of providing short term crop loans to farmers at 7 per cent interest has been retained with additional subvention of 3 per cent to those farmers who repay their crop loans on time. In addition, the same interest subvention on post harvest loans up to six months against negotiable warehouse receipts will also be available, which will encourage the farmers to keep their produce in warehouses thereby providing a much needed post harvest agri-infrastructural support towards reducing farm gate wastage and giving pricing power to farmers.

Post harvest storage infrastructure

Post harvest wastage is a key inefficiency that needs to be corrected and in the budget the corpus of Rural Infrastructure Development Fund (RFID) has been increased from Rs 18,000 crore to Rs 20,000 crore with a special sub allocation of Rs 5,000 crore dedicated for warehouse development.

The Finance Minister has indicated that nearly 15 million tonnes capacity is being created under the Private Entrepreneur’s Guarantee Scheme, of which 3 million tonnes of storage capacity will be added by the end of 2011-12, and 5 million would be added next year.

To boost investment in post harvest infrastructure, capital investment in the creation of modern storage capacity has been made eligible for viability gap funding scheme of the Finance Ministry at an enhanced rate of 150 per cent as against the current rate of 100 per cent.

INCREASING PROCESSING INFRASTRUCTURE

With a view to retain the momentum of private investment in building the food processing capacity of the nation, the Plan outlay for 2012-13 of the Ministry of Food Processing Industries is Rs 660 crore. The allocation under all three components, i.e. mega food parks, cold chain, value addition and preservation infrastructure and modernization of abattoirs, have been maintained to upscale the execution of these schemes.

The Ministry has also proposed for a major shift in its role from implementing agency to policy formulation with greater involvement of State Governments through newly proposed centrally sponsored scheme of ‘National Mission on Food Processing’ for which Plan outlay of Rs 250 crores has been proposed for 2012-13.This Mission will enable the Government to have a better outreach and to provide more flexibility to suit local needs as well as ensuring greater Public –Private partnership in the Food processing sector.

FERTILISER AVAILABILITY AND USE

A mobile- based Fertiliser Management System (mFMS) has been designed to provide end-to-end information on the movement of fertilisers and subsidies, from the manufacturer to the retail level. This will be rolled out nation-wide during 2012. This step will benefit 12 crore farmer families, while reducing expenditure on subsidies by curtailing misuse of fertilisers

To reduce India’s import dependence in urea, the Government plans to finalise pricing and investment policies for urea. It is estimated by the government that with the implementation of the investment policy, country will become self sufficient in manufacturing urea in the next five years. In case of the potassic-phosphatic (P&K) fertiliser, use of single super phosphate (SSP) will be encouraged through greater extension work.

With a view to increase indigenous fertiliser production, the rate of withholding tax on interest payments on external commercial borrowings for capital investment in fertiliser production has been reduced from 20 per cent to 5 per cent for three years.

In addition, capital investment in fertilisers have been made eligible for viability gap funding scheme of the Finance Ministry at a rate of 150 per cent and imports of equipment for initial setting up or substantial expansion of fertiliser projects have been fully exempted from basic customs duty of 5 per cent for a period of three years up to March 31, 2015.

MEASURES THAT NEED FOCUS IN THE LONG TERM

While the budget has broadly focused on the short term imperatives of increasing agricultural production, increased access to farm credit and building post harvest storage and processing infrastructure, an aggressive perspective of trying to double agricultural growth needs to be envisioned. Some of the key enables for this jump-growth include:

Creation of agri-marketing infrastructure.

Incentivised shift towards drip-irrigation.

Incentives for farm machinery and technology.

Creation of a national policy on cropping pattern, with well defined market-linkages.

Creation of a national body collecting global commercial intelligence on crops.

Stable market-linked export-import policy.

CONCLUSION

The Union Budget’s focus on investment in farm production and post harvest management is commendable. However, as the demand for agriculture grows, future union budgets would need to focus on even larger scale investment into fundamental enablers of agricultural growth with a target of achieving at least 6-7.5 per cent per annum growth.

Agriculture and food processing industries minister Sharad Pawar, on Tuesday, called upon cooperative institutions to contribute to creation of storage and cold storage capacity.

Addressing the 72nd Meeting of General Council of National Cooperative Development Corporation (NCDC), Pawar said that cooperatives have a distinct role in post-harvest management.

Pawar said, “NCDC sanctioned assistance for creation of 3.70 lakh tonnes of storage space in 2010-11 and 3.94 lakh tonnes in 2011-12 by January 31, 2012, including renovation of existing godowns. Development of cold chains shall be one of the thrust areas of NCDC. It would be pertinent to mention here that NCDC has been appointed as an agency for accreditation of warehouses by the Warehousing Development & Regulatory Authority. The implementation of this system will facilitate creation of more efficient supply chains, provide enhanced rewards for grading and quality, enable better risk management, ensure higher price realisation for farmers and better services to consumers.”

The minister informed the members that amendment of NCDC Act to include producer companies within its ambit, has already been approved by the Cabinet and they will soon be eligible for assistance under NCDC. He said, “NCDC achieved excellent performance during 2010-11. The performance indicators like net profit (before tax) at Rs 141 crore, recovery level of 99.7% and nil net NPA bears testimony of that. This deserves greater commendation in light of the high cost of borrowing in the money market and NCDC’s ineligibility to access priority sector finance beyond March 31, 2010. The same situation prevailed during current financial year 2011-12 also and NCDC is making all out efforts to cope up with the challenges and post equally comparable performance as in the previous year. Under the prevailing circumstances agriculture sector of the country needs to become more competitive, efficient and profitable. It is a matter of satisfaction that agriculture sector in India is looking up.”

The programme of activities of NCDC for the year 2012-13 involves an outlay of Rs 4,200 crore. NCDC will continue to support and supplement the efforts of state governments towards development of cooperatives in agriculture and allied sectors. Priority will be given to programmes aimed at benefiting weaker sections and remote regions, enhancement of storage and cold storage capacity including their renovation, integrated cooperative development projects and projects in new thematic areas. Due emphasis will be given to assisting small cutting-edge projects in large numbers.

The entry of Future Supply Chain Solutions into multi-brand retail via a subsidiary has given some regional brands the kind of exposure they could only aspire to before.

Shopping for the humble bathing soap has now become an arduous task for the tiny tot’s mother. She now has to choose not just among proven national brands like Johnson & Johnson or Himalaya, or for that matter Wipro’s Baby Soft; time permitting, she has to examine the benefits of picking a Doy Kids versus a Woodwards or a Mysore Sandal baby soap, and carefully evaluate the pros and cons of deploying shapes such as elephant, lion and bear and many others that grace the shelves of modern retail.

FMCG and food sections in such stores have seen an influx of smaller and regional brands in recent months. But the rules of distribution for modern chain-stores are very different from distribution for kirana stores. While the tussle between large brands and retailers make news headlines, smaller brands have more often grappled with margin issues, delayed payments and supply chain shortfalls. Enter FSC Brand Distribution Services (BDS), a subsidiary of Future Suppy Chain Solutions (FSCS), the logistics arm of the Future Group. A Big Bazaar or Food Bazaar may or may not stock the above brands but an outfit such as this helps brands of any size access a full-fledged modern trade servicing team, complete with logistics, store management as well as strategy.

* FSC Brand Distribution Services Limited is a 100 per cent subsidiary of FSCS, which started a year and a half back. By 2012-13, it is expected to exceed Rs 100 crore. For now, it has clocked Rs 50 crore

* It distributes third-party FMCG brands to Future Group’s Big Bazaar/Food Bazaars and other organised retailers like Hypercity, Reliance etc. Services close to 1,900 outlets across India, out of which 208 are Big Bazaars/Food Bazaars

More than the large pan-India brands, it is the regional brand which stands to gain by riding on modern trade. Devangshu Dutta, chief executive, Third Eyesight, a retail consulting firm, says, “Small or new brands offer the modern retailer more margins while the retailer, in turn, affords them consistent demand and a scale to grow. Future Group has done it more aggressively than others.”

Most of the brands that have signed up with BDS first came into modern retail, and often wide national circulation, through Big Bazaars and Food Bazaars which stock non-food FMCG products as well. Modern trade may still comprise 5-6 per cent of the overall FMCG market of Rs 130,000-Rs 140,000 crore, but in urban areas it hovers at 20 per cent. Devendra Chawla who is the president of food and FMCG at Future Group and has studied brand-play closely at its retail stores, says, “The many categories of Indian packaged food are still restricted to their original markets in their regions. Some of the regional brands are also challenger brands which lack the wherewithal of large brands in distribution. Modern retail stores can incubate these over time, building customer loyalty. For such brands they also provide the quickest route to the national market.”

As many mid-sized and small brands (below Rs 500 crore) lack the volumes to justify a separate team or investment in a supply chain to keep in stride with organised retail, they take the next best option — to enter some sort of distribution understanding with the big daddies of the game — such as the Future Group, Hypercity, Reliance and more.

At the same time, organised retailers, which are often large national players, don’t bend terms to suit such brands. Future Supply Chain CEO Anshuman Singh explains, “Organised retail chains expect brands to manage shelves, offer promotions and take replenishment orders through automated systems.” In general trade, the brands would just sell stocks to a distributor/stockist who would take care of the supply chain from there on. He would sell it to dealers and retailers who place orders ad hoc, on the phone.

The larger players in the FMCG space service organised retailers themselves while others resort to logistics companies and transporters or even general trade distributors who supply to stores on their routes. But these players are not comfortable with the different set of rules. For example, when servicing modern trade, distributors who have to buy stocks from brands and then pass it on to modern retail stores, might have to wait for payment since organised retailers have longer credit periods than the stockists in general trade. They often pay those brands first whose stocks fly off the shelves the fastest.

The task of labeling and packaging is another bone of contention as is the longer time taken for delivery. Most modern trade outlets have a designated time for deliveries leading to a narrow window and a queue unlike general grocery stores. At the end of the day, if the shelves remain empty, as they would with a brand’s average of 70 per cent fill rate in general trade, organised retailers just fill their shelves with other brands.

What brands get
Large FMCG companies by now have a modern trade cell. But for some brands, it would mean a distraction from the core business. Ajay Gupta, managing director at Capital Foods (in which Kishore Biyani has 40 per cent stake through Future Ventures), makers of Ching’s Secret and Smith & Jones, says, “In the long term, we would like to focus on building our brand and leave the modern trade distribution to a specialist for a country as vast as India. There is a huge range in food, limited shelf life, high substitution since people don’t wait over and above the issue of local taste.”

The Rs 118-crore company has handed over 30 per cent of its modern trade distribution to BDS with plans to hand over more. In Delhi, where BDS has taken over, Capital Foods has seen a jump from 44 per cent to 70 per cent in fill rates. Singh reasons, “General stores are in millions, and hence need so many distributors. But in modern trade, which has about 40 retail chains with 2,000 stores across India, a national distributor not only can service but also bring in supply chain efficiencies.”

Rajheev Agrawal, director and CEO of Nilon’s Enterprises, which is India’s largest pickle manufacturer with a turnover of Rs 240 crore, says, “We wanted to free ourselves from following up on purchase orders, payment collections and even merchandising at the large stores. Except for some areas which BDS does not service such as Guwahati, almost 80 per cent of our modern trade distribution is handled by them.” Modern retail returns about 15-16 per cent of Nilon’s revenues, with same store growth clocked at 25 per cent after signing up with BDS.

Ravi Chandra, general manager, sales and marketing at Super-Max Personal Care, says BDS helps with improved fill-rates and reaching smaller town which its own sales force didn’t reach. Gupta of Capital Foods agrees, “We can now reach tier 2 towns, thanks to their footprint.” Singh elaborates, “Distribution to smaller towns comes at a large cost. The volumes might not fill entire trucks for general distributors. But we already have our own transport business in the Future Supply Chains, which we ride easily.”

Ameve Sharma, president of Baidyanath Ayurved Bhawan, says, “In modern trade, every single outlet expects me to deliver stocks to it from my depot, manage inventory and negotiate consumer schemes. It is a full-time job.” This even though modern trade is less than one per cent for its Rs 410 crore turnover.

Some of BDS’ clients have seen huge jumps in their sales as a result, according to analyst estimates. They estimate 300 – 1,000 per cent increase in modern trade sales of for some of the brands BDS services. Singh says, “There is a thin line between national and regional brands. Some brands might be widely available in south India. But their presence in, say, Delhi, would be counted as presence in the north, even though it would be just one city.” Brands have to shell out a slightly higher percentage of margins for BDS’ services (11 per cent instead of 5-8 per cent on the product, according to some clients).

The big push
Future’s Singh says, “We entered FMCG distribution because we had access to both the back-end and the front-end of FMCG retail.” BDS will only be handling distribution of FMCG brands in modern trade. “We will stick to what we know best,” points out Singh. At work is the integration on the retail side with Future Group’s 208 Big Bazaars. For example, BDS works with the small brands on promotions at Big Bazaar well in advance. Plans for the discount days around January 26 — which is an annual feature now — are already afoot, with these brands manufacturing and storing stocks for additional demand.

Chandra of Super-Max and Gupta of Capital Foods point out the assortment of products based on store location is a lot better with the help of BDS’ insights. Singh says, “Understanding what flavours of wafers will work in which regions comes to us naturally, and are of help to brands like Dukes, for example.”

The front-end integration ensures that BDS always has a retail chain, the country’s largest, as its client. However, Singh claims that gradually other retailers too are subscribing to its services. Singh says, “About 20 per cent of the business (Rs 310 crore) now involves servicing other retailers.” BDS reaches 1,700 stores of other retailers.

Logistics heritage
While logistics companies would not have an in-house retail chain to learn from, retail distributors would not have a supply chain set-up like BDS has. Dutta of Third Eyesight reminds that other retailers such as Reliance had drawn up plans for supply chain integration but it was scuppered by the downturn. FSCS had been building up its logistics capabilities over the last four years. Singh believes the supply chain automation which FSCS has invested in will stand it in good stead when dealing with FMCG products.

The supply chain set up that BDS has access to offers more advantages than what is offered by regular distributors. Apart from the technology, it also incorporates features such as roll-cages which make the consignments from the warehouses to the stores shelf-ready. These allow store attendants to unpack right at the shelves with pre-sorted packaging and labeling, instead of unloading at a warehouse of the store and sorting. Shrinkage, which is a result of product pieces missing along the supply chain due to damage or stealing, has been reduced by almost 90 per cent as a result. Loading and unloading times have been reduced by 20 minutes, vital when the window to deliver goods at retail chains for everyone is about three hours.

Real-time tracking of vehicles of within one metre further saves on time and lets brand owners view their consignments. BDS’s six distribution centres which consolidate stocks also allow the flexibility to meet additional demand from one store, which the general distributors might not have met.

The use of technology by the BDS team is acknowledged by competitors as well — for instance, its ‘Put to light’ sorting which ensures that the BDS team can send shelf-ready product pieces to respective stores rather than cartons. Compared to supply chains which don’t have this technology, the speed of picking an order at the distribution centres of BDS has improved by 40 per cent while the order-picking for the various retail stores from the distribution centres is 100 per cent, says Singh.

Ashutosh Chakradeo, head, buying, merchandising & supply chain at Hypercity Retail, says, “BDS, given its lineage, understands our needs better as well. We needed shelf-ready packs rather than cartons for delivery which they have enabled. We can do it for larger brands but for smaller brands the volumes don’t justify investments.”

BDS plans to put its own salespeople in modern retail chains to push its bevy of products, another service that individual brands might not have been actually able to afford. Sampling, which is critical in modern trade, will get a boost without the need for additional ad spends, says Singh.